July 19, 2023Dated: | ByManish Kumar Manish Kumar | Tax planning strategies are methods used to minimize tax liabilities and maximize tax breaks in a legal and efficient manner. The UAE Ministry of Finance has announced corporate tax relief for small and micro businesses in the United Arab Emirates (UAE). The relief is applicable to both onshore and free zone companies and will come into effect on June 1, 2023. The Corporate Tax Law will apply to both onshore and free zone companies, and corporate tax rates will be 0% on taxable income up to AED 375,000 and 9% on other taxable income. Free zone entities that maintain adequate substance in the UAE and comply with transfer pricing rules and do not select to be subject to full corporate tax rates will be subject to corporate rates of 0% on “Qualifying Income” and 9% on other taxable income. The Small Business Relief only applies to a “Resident Person,” which is defined broadly, incorporating a managed and controlled test and an incorporation test, both of which derive from international tax principles. The relief is set to be applicable for three tax years. Taxable persons that are resident persons can claim Small Business Relief where their revenue in the relevant tax period and previous tax period does not exceed AED 3 million. When applying the revenue threshold, a Taxable Person’s revenue shall be determined in accordance with UAE applicable accounting standards. Small Business Relief must be claimed by way of an election. The revenue threshold for small businesses to qualify for the UAE Corporate Tax relief is AED 3 million (approximately USD 816,000). This threshold will apply to all tax periods from 1 June 2023 through to 31st December 2026, when the Ministry of Finance may decide to vary these thresholds. The Small Business Relief only applies to a “Resident Person” with revenue below AED 3 million in the relevant tax period. When applying the revenue threshold, a Taxable Person’s revenue shall be determined in accordance with UAE applicable accounting standards. Relief for small businesses is a feature of corporate tax regimes in a number of other jurisdictions, such as Hong Kong and the UK. However, the Small Business Relief is comparatively generous in that it provides for a complete exemption from corporate tax as opposed to a reduced rate. To be eligible for small business relief in UAE corporate tax, the following criteria must be met: 1. The relief only applies to a “Resident Person,” which is defined broadly, incorporating a managed and controlled test and an incorporation test, both of which derive from international tax principles. 2. The relief is set to be applicable for three tax years. 3. Taxable persons that are resident persons can claim Small Business Relief where their revenue in the relevant tax period and previous tax period does not exceed AED 3 million. 4. When applying the revenue threshold, a Taxable Person’s revenue shall be determined in accordance with UAE applicable accounting standards. 5. Small Business Relief must be claimed by way of an election. In summary, the tax relief is intended to encourage investments, small businesses, and start-ups. For further clarifications and queries, Flying Colour Tax Consultant can assist you for a comprehensive advisory from our team of professional experts.